Will Australia Get A Carbon Tax in 2011?

Australia is set to introduce a carbon tax (details to be released on Sunday 10 July 2011). This post is the place to discuss this policy — the good and the bad.

A description, from the Australian Parliamentary Library:

A carbon tax is a tax on energy sources which emit carbon dioxide. It is a pollution tax, which some economists favour because they tax a ‘bad’ rather than a ‘good’ (such as income). Carbon taxes address a negative externality. Externalities arise when an individual production or consumption activity imposes costs or benefits on others. In market transactions, these costs and benefits are not normally reflected in the prices involved in the transaction, or taken into account in the transaction decision.

By placing a cost on these negative externalities the underlying purpose of a carbon tax is to reduce emissions of carbon dioxide and thereby slow global warming. It can be implemented by taxing the burning of fossil fuels—coal, petroleum products such as petrol and aviation fuel, and natural gas—in proportion to their carbon content.

There is some political support for a carbon tax in Australia as a means of implementing a carbon price. Some groups favour this approach as an interim step on the way to an Australian emissions trading scheme.

Here is what I (Barry Brook) said about Australia’s proposal a while back, in response to the 2011 update papers of the Garnaut Climate Change Review :

Garnaut has elaborated and updated his report in line with the latest science and lack of effective action nationally and globally. But the bottom line, in my opinion, remains the same. We need to scrap the renewable energy target (RET), Renewable Energy Certificates (RECs) and feed-in tariffs (FiTs), set a low initial carbon tax at about $10/t, establish an equivalent of the Board of the Reserve Bank to manage the tax and set future prices, and have some legislated schedules (gateways) such as a floor price of $20/t by 2015, $30/t by 2020, and so on. The rising price – with short-term decisions taken out of Government hands to avoid distortions arising from political expediency – is absolutely key. Finally, and in line with eliminating the RET and FiTs, we need to really level the energy playing field and allow nuclear to compete with renewables and fossil fuels with carbon-capture and storage (CCS).

Here is a useful description of some other carbon prices worldwide (Finland, The Netherlands, Sweden, India, Norway, Denmark, Switzerland, Ireland, Costa Rica).

Australia is proposing an initial carbon tax, followed some years later by a cap-and-trade system. What is the difference? Here is a brief summary (my perspective, with bad points in red and good points in green):

CARBON TAX

•Politicians or bureaucrats set costs – inefficiencies and pressure
•No guarantee that emissions will fall
•Clear forward price projection = investment certainty
•removes incentives for hedge funds, derivatives etc.
•better allows for long-term business planning
•Can use current tax system
•Better handles emission-intensive trade-exposed industries via import/export carbon tariffs/refunds
EMISSIONS CAP-and-TRADE

•Cap reductions ensure falling emissions – in theory
•Reduce inefficiencies or overpricing
•Creates both incentives and disincentives for abatement
•Chance to profit from ‘doing the right thing’
•Enrich middle men / brokers
•Requires army of bureaucrats / new system
•Encourages rent seeking – pleading by special interest groups
•Limited price certainty – requires projected ‘gateways’
Here are some further details about the history of the discussion here in Australia:

Australia has considered both cap-and-trade schemes and a carbon tax. In 2007, the Productivity Commission suggested that a carbon tax should be implemented.[]

On 30 April 2007, the state Labor Governments commissioned the Garnaut Climate Change Review, whose sponsorship was joined by the Rudd Government soon after taking office in December 2007. The resulting report, delivered on 30 September 2008, recommended an Emissions trading cap-and-trade system. Subsequently the Rudd Government proposed a Carbon Pollution Reduction Scheme, which after much criticism, was voted down in the Australian Senate by both the Australian Greens (for being too ineffective), and the conservative Coalition (Australia) (for the effect on key economic sectors), as well as independent Senators Nick Xenophon [1] and climate change sceptic Steve Fielding.

In February 2010, the Australian Greens proposed an interim carbon tax of $A23 a tonne for two years.[2] In April 2010, academics from the Australian National University published a proposal for a carbon tax on major polluters (such as coal-fired power stations and oil companies) that would provide increased funding for Australian public hospitals and other health costs associated with climate change.[3]

On February 24, 2011, Australian Federal government announced a framework to implement a Carbon Tax from July 1, 2012. It is set to be implemented over 3–5 year period upon which it will switch to a cap and trade system. The price has not been set but various proposals have been discussed in the recent past, such as $23/t and $26/t. The announcement came after an agreement between the Federal Labor government, the Greens and two Independent MPs and included commitments to ensure all funds collected go back to homes and businesses to assist in the transition to renewables.[4] This led to accusations that Prime Minister Julia Gillard had breached a pre-election promise not to introduce such a tax where she stated to Network TEN: “There will be no carbon tax under the Government I lead”. The Leader of the Opposition, Tony Abbott, has called for an election over the issue.[5]

On June 5, 2011, the Say Yes demonstrations were held in which 45,000 people demonstrated in every major city nation-wide in support of a price on carbon pollution.[6] Many demonstrations have also been held around the country and in regional towns against the proposed Carbon Tax, albeit to a lesser extent.

For more discussion and critiquing on BNC on the topic of emissions cap-and-trade, carbon taxes and other proposals like fee-and-dividend, please consult the following posts: